Saving for education is one financial goal for many families. Tuition and other expenses associated with higher education have risen to levels that can be staggering. Whether the costs are pertaining to a child’s college education or adult education programs, planning can help soften the financial blow. A variety of savings plans and options are available to help individuals and families prepare for educational expenses effectively.
What Is an Education Savings Account?
One of the most highly preferred educational savings plans is the 529 College Savings Plan. There is also the 529 plan. A 529 plan is a state-sponsored plan that allows for saving money on a tax-free basis towards qualified education expenses. These might include tuition, fees, books, and room and board. Contributory amounts in a 529 plan grow tax-deferred, as do withdrawals made for eligible expenses. In fact, some states offer tax deductions or credits for contributions; therefore, the 529 plans are a very good choice for quite many families.
Yet another is the Coverdell Education Savings Account, where families can set aside up to $2,000 per year for each beneficiary. Like a 529 plan, this money grows tax-deferred, and withdrawals made toward qualified education expenses are tax-free, but there are income limits, which makes it inaccessible to more affluent families. Money also has to be spent by the time the beneficiary has turned 30, an inappropriate deterrent for long-term planning.
Custodial Accounts and Saving Money
Custodial accounts can be used to save for education. Custodial accounts are governed under the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). Custodial accounts allow an adult to control assets on behalf of a minor until that person attains adulthood. Custodial accounts allow some flexibility in how the funds may be used, and there is no particular reason why it need be limited to education spending; it is considered the child’s asset, though, which may impact financial aid eligibility.
A regular savings account, devoted solely to education, is another viable option for those who think a little more traditionally. This option has no tax advantages associated with 529 plans or ESAs, but there is some comfort in having money available when needed. Other investment vehicles may be added to regular savings accounts such as stocks or bonds, as well as financial growth over time.
Scholarships and Financial Aid
Saving money also entails scholarship and financial aid in the education funding strategy of families. Many scholarships grant awards based on merit, need, or targeted criteria such as ethnicity, focus, or extra-curricular activity. It can significantly decrease the overall cost of education to search and apply for scholarships.
Some of the available financial aids include federal student loans and grants that can help sponsor your education. The very first step towards accessing federal student aid is by filling out the Free Application for Federal Student Aid, or FAFSA, so fill it out as soon as possible.
Goal Setting and Plan Development
The way to achieve this is by creating specific goals and having a complete savings plan. Families will consider the age of the child, possible future tuition costs, and a current financial situation. Online calculators can project approximately how much money must be saved each month to meet certain education funding objectives.
Furthermore, the savings plan should periodically be reviewed and updated. The contributions made by the family and the supplemental plans will change as the children age and education expenses vary.
Conclusion
Saving for education is an integral component of any effective financial planning that should not be taken lightly and must be planned with care. With all these options at their disposal-the 529 plans, Coverdell ESAs, the custodial accounts, and regular savings families can make a choice that would be right for their situation. Furthermore, with scholarship and financial aid available, most of the costs of education would be easily alleviated. Clear goals, together with a well-tailored savings plan, help families prepare well for expenses resulting from education, letting the gates to opportunities swing open for future generations.
